Earlier in the year, the FCA said it had concerns over a possible “lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry”. Its 2017/18 business plan announced an exploratory piece of work to identify who uses these products and assess the sales processes, whether the products cause harm and the due diligence that firms undertake before providing motor finance.

In its update, the FCA confirms that its main area of focus is on the use of Personal Contract Purchase (PCPs), and on the options to own the car by paying the Guaranteed Future Value (GFV), or to enter into a new agreement, if equity has been built up, which it describes as “a key driver for brand loyalty that many customers find attractive”.

Consumer risk

The FCA concedes that while lenders are at greater risk from a change in GFV rates, consumers face more limited risks. However, it warns these may be heightened where there has been an inadequate assessment of affordability and/or a lack of clarity for the consumer in their understanding of the contract.

While PCP is the most popular choice by some way, the regulator’s research has also identified an extensive range of products across the market: some based on ultimate vehicle ownership (either as an option, or a condition); and others based on “usership”, with no requirement to purchase.

The FCA warns that the terminology used in the motor finance market is not universal and may be confusing, and says it is essential that consumers understand the risks and particular features of the motor finance they are taking on.

The investigation has also established that lenders may apply price and commission caps on their broker/dealer partners, and that new car offers/promotions are often heavily supported by manufacturers (often with fixed rates of interest). For used car sales, particularly where there is no finance subsidy or deposit contribution, there may be a greater risk that the finance aspect of a car purchase is used to generate a margin on the sale, the FCA warns.

Future work

The FCA says its future work in the area will consider whether firms are taking the right steps to ensure that they lend responsibly, in particular by appropriately assessing whether potential customers can afford the product in question.

It will also examine potential conflicts of interest arising from commission arrangements between lenders and dealers, and how these are managed.

The investigation will take a closer look at whether the information provided to potential customers by firms is sufficiently clear and transparent, so that they can understand the risks involved and make informed decisions.

Finally, the FCA plans to look at how firms are managing the risk that asset valuations could fall, and at how they are reflecting this in their pricing.

The FCA says this will involve supervisory work with lenders, detailed analysis of millions of anonymised credit reference agency records, and careful scrutiny of firms’ sales practices and processes.

The regulator is working closely with the Bank of England and the Prudential Regulation Authority, who are considering the risks raised by the expansion of motor finance that fall within their regulatory remit.

The FCA’s next update is due in Q1 2018.

Industry reaction

Stephen Sklaroff, Director General of the Finance & Leasing Association (FLA), said: “We note that the FCA has found that most firms address affordability in an appropriate way.

“We look forward to working closely with the FCA on affordability assessments in the consumer credit markets, and as it carries forward its exploratory work to develop its understanding of the motor finance markets.

“We welcome the FCA’s focus on vulnerable customers, and we have recently published our own new guidance for the lending industry on how best to identify and support such customers.”